South Korea’s top financial regulator’s recent decision to extend a temporary ban on stock short selling has garnered mixed reviews from market analysts and retail investors.

Financial Services Commission Chairman Eun Sung-soo said on Wednesday that the temporary short selling ban will be lifted from May 3 on 200 stocks listed on the main bourse Kospi and 150 stocks on the tech heavy Koadaq. The government has banned the shorting scheme since March 16 last year over growing concerns over sharp stock market declines amid the coronavirus crisis. The temporary ban, extended once in August for six months, had been scheduled to expire on March 13.

“Although there are some shortcomings of the short selling ban, like limited hedging options for foreign investors, it is important not to hurt investor sentiment (by keeping the restriction in place),” said Ahn So-eun, an analyst from IBK Securities & Investment, forecasting stock market corrections will be limited in terms of duration and depth thanks, partly, to the restriction.

Some market watchers also said the trading scheme is highly necessary as global ratings firms and index providers, including MSCI and FTSE, evaluate stock markets based on whether shorting is allowed or not, among other factors.

“In order to prevent passive assets from leaving the local market, short selling is necessary,” said Seol Tae-hyun, an analyst at DB Financial Investment, adding “Foreign investments that track indices provided by companies like MSCI and FTSE are worth more than 280 trillion won ($250.4 billion), so banning the shorting scheme indefinitely would do more bad than good.”

A group of retail traders, however, criticized the government’s plan to partially resume short selling on May 3, claiming the extension of the ban is a stopgap measure before by-elections slated for mid-April.

“If stock market indices fall due to short selling of large caps, other stocks would largely be affected,” said Jung Ui-jeong, chief of the Korea Stockholders Alliance, an organization that represents some 22,000 retail investors, adding, “The government’s measure falls short of preventing deep pocketed short sellers from profiting off of individual investors.”

Shorting, mostly utilized by institutional and foreign investors, is a trading technique in which investors borrow and sell stocks in the expectation that stock prices will fall. Short sellers later repurchase stocks at a lower price than the price they sold, and return them to the lenders.

By Kim Young-won (wone0102@heraldcorp.com)